In this week’s article, former mortgage broker Steven Lawson continues his explanation of the problems associated with interest-only mortgages.
This week, Steven goes on to explain what to do if you have an interest-only mortgage but don’t have the means to repay the debt at the end of the term.
“The main reason that people took on interest-only mortgages was that they were cheaper than the more traditional repayment mortgages.
“Most high-street lenders would have asked to see what arrangements borrowers had in place to redeem the mortgage – and see evidence of such.
“They often wanted to see an endowment policy, which would have been linked to a life insurance policy so that not only would the mortgage be repaid by the due date but it would also be repaid in the event of the death of the mortgagee if they passed away.
“One of the main problems with this was that whilst the lenders wanted to see a policy in place before granting the mortgage, in the vast majority of cases they made no check whatsoever to see if the plan was being maintained.
“In effect, that meant that the mortgagee could either cancel the endowment policy or let it lapse immediately after taking it out, thus dramatically reducing their monthly outgoings.
“Of course, not everyone wanted to go down this path and took out their policies in good faith, but sometimes personal circumstances changed – such as the loss of a job, divorce or illness – and meant that they had insufficient funds to pay both the mortgage lender and the company that issued their endowment policy. The choice of which one to pay was obvious.
“Another reason for the popularity of interest-only mortgages, particularly in the '90s, was the massive boom in house prices and the vast amount of cash available to lenders.
“With prices in many areas increasing by 15% or more per annum, some people simply wanted to get on the property ladder and take advantage of the vast profits they could make when they decided to sell their property and weren’t interested in repaying the capital.
“Mortgage lenders were well aware of this, but many of them were only too pleased to lend their money to anyone who met their criteria. They were not too concerned as to how the debt would be repaid, knowing that they would have sufficient equity in the property should the mortgage fail to be redeemed."
WHAT TO DO IF YOU CANNOT REPAY THE MORTGAGE DEBT
If you cannot repay your mortgage, Steven advises as follows:
“The best advice in ALL cases is to speak to your lender. There is nothing worse than lack of communication or burying your head in the sand and hoping that the problem will go away – it won’t!
“Depending on your circumstances, many lenders would be prepared to extend your mortgage term and put the outstanding balance on a repayment basis for the rest of the term, but if you owe a lot of money, it may be impossible for you to afford the payments."
About downsizing, Steven says:
“Another option is for you to sell your home, pay off the mortgage and use the remaining balance to buy a smaller property.
“If you bought wisely some years ago, you may have made a substantial profit on your property so it shouldn’t be too much of a problem to find somewhere suitable to live without too much discomfort.
“The most important thing is not to leave it too late, or you may find your property repossessed and sold at auction for a fraction of its value.”
If this problem concerns you, contact an Independent Financial Adviser who may be able to help you. There will likely be a small fee to pay, but the advice given could prove invaluable.